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Chapter 6. Conclusions

Author(s):
Carlo Sdralevich, Randa Sab, Younes Zouhar, and Giorgia Albertin
Published Date:
July 2014
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Main Lessons and Takeaways

In this paper, we have reviewed subsidy reform in many countries in the world with particular attention to the reforms recently undertaken in the Middle East and North Africa (MENA) region that can be helpful in designing and implementing subsidy reform. Among the key elements of success, the most relevant lessons for MENA countries are:

  • A subsidy reform strategy needs to be well prepared, executed, and followed through. Such a strategy is likely to require time and effort, and policymakers should not underestimate the resources and political capital needed;
  • Strong government ownership and commitment to reform, consensus building, and communication are crucial to make the population aware of the costs of subsidies and to show the benefits of reform, thus overcoming resistance, particularly from those who would lose out—at least in the short term—and mobilizing the support of those who would gain; and
  • Establishment of social protection mechanisms prior to subsidy reform efforts is crucial to building support for reform and protecting the vulnerable. Subsidy removal should be gradual and accompanied by the introduction or the scaling-up of well-targeted social safety nets, preferably in the form of targeted cash transfers or vouchers, to compensate those who are most affected by higher prices.

The Way Forward

The recent progress made by several MENA countries in addressing energy subsidies is encouraging; however, as discussed in Chapter 4, these reforms are far from complete. In particular, price increases have been often implemented on an ad hoc basis and have not been large enough to bring domestic prices in line with international levels. Also, in some countries, social safety nets have not been sufficiently strengthened. Finally, reform so far has been confined mostly to oil-importing countries—where fiscal and, in some cases, external pressures have been the most important and most urgent motivation for reform. Much remains to be done to tackle subsidies in the region.

First, governments in countries that have started reform should build on progress already achieved, by:

  • Completing the scaling-up of well-targeted social safety nets to better protect the vulnerable;
  • Setting a clear timeline for gradually raising domestic prices to international levels, to ensure predictability for both consumers and producers and to facilitate adjustment; and
  • Specifically for energy subsidy reform, introducing, or implementing more rigorously, automatic price-setting mechanisms—possibly coupled with smoothing features, and tackling subsidies in the energy sector that result in losses to state-owned electricity companies and recurrent transfers to the sector. Electricity tariff increases should also be combined with restructuring of the sector to ensure greater access and better quality.

Second, governments in countries that have not yet started comprehensive energy subsidy reform should take a hard look at the advantages of containing these subsidies. This paper shows that reform would be beneficial in oil-importing and oil-exporting countries: reducing fiscal vulnerabilities, removing distortions that discourage labor-intensive industries and stifle employment creation, and containing domestic overconsumption—which would help to reduce current account pressures in oil-importing countries and increase exportable resources in oil-exporting countries, thereby adding to wealth accumulation. Overconsumption is also a key driver of environmental damage, and reducing it would contribute to better health outcomes. Hopefully, many countries will be encouraged by the experience of the seven countries described here, which shows that progress in energy subsidy reform can be achieved even if not all the elements for success are present.

In fact, the economic homogeneity of some subregions in MENA (e.g., Mashreq, Gulf Cooperation Council) increases the potential for regional coordination in preparing or considering subsidy reform, particularly for fuel products.

Even if policymakers feel that the moment is not yet right for comprehensive subsidy reform—whether of energy or food subsidies—there are measures that can be taken to prepare the ground for future action. In particular, governments can improve transparency on subsidy costs and beneficiaries, and gather data and information on household consumption and poverty that will help establish or improve social safety nets. Past reform cases have shown that the preparation, consensus building, and implementation of well-designed subsidy reforms take several years. Thus, governments should start acting now to give themselves the chance of building a long-lasting and durable reform later.

Finally, for all countries, managing the social impact of reform is key, but particularly so for the countries undergoing political transition. In this context, policymakers and international stakeholders must move carefully and choose the reform mix that balances fiscal and efficiency returns against social opposition to price increases. This may mean, for example, postponing socially sensitive food subsidy reform in favor of fuel price increases that have less impact on the poor. Good timing in the scaling-up of existing social safety nets or introducing well-targeted mitigating measures is therefore crucial.

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